Our prior posts discussed Complainant LSI’s comments and respondent Realtek’s comments in the ITC’s investigation of whether Realtek and Funai infringe LSI’s alleged standard essential patents (SEPs). These comments were submitted in response to the Commission’s request for information on various issues to aid in its review of the ALJ’s conclusion that Realtek and Funai did not infringe LSI’s SEPs.Like LSI and Realtek, respondent Funai also submitted comments on merits issues as well as comments on public interest and remedy, both of which addressed various SEP-related issues.

Funai’s Comments on the Merits

Induced Infringement

Funai contends that, in order for LSI to prove induced infringement of its alleged SEPs, LSI must show both direct infringement by a third-party as well as “specific intent to cause [such] infringement” by Funai. But (1) the ALJ found that LSI failed to prove infringement based on the claims covering the H.264 standard, (2) LSI’s attempt to show intent based on LSI’s marketing its products as complying with H.264 failed to show “that Funai actually believed that the H.264 processes infringed the ‘663 patent”, and (3) LSI did not show direct infringement because its expert did not read the ‘663 patent claims onto H.264 and simply assumed that users actually performed the H.264 standard even though they could use Funai’s products without practicing that standard.

Invalidity and Priority Date of the ‘958 patent

Funai also asserts that the ‘958 patent is invalid over a proposal made by another entity to the IEEE when developing the 802.11 standard:

“The Harris Proposal was presented to the IEEE Working Group [for the 802.11 standard] and made publicly available at least as early as November 10, 1997. … Accordingly, to the extent that the asserted claims are entitled to a priority date of 1998 and not 1996, the Harris Proposal is prior art to the asserted claims. …[The Harris Proposal] discloses the same digital modulation system that formed the basis for the ‘958 patent.Accordingly, the asserted limitations of the ‘958 patents relating to the functional elements of the claimed modulation systems … are present in the Harris Proposal.”

LSI asserts that “the ‘958 and ‘867 patents are infringed simply by practicing different aspects of the IEEE 802.11 standard” and that “the ‘663 patent is infringed simply by practicing the H.264 standard.” But, according to Funai, “the [ALJ] correctly recognized that practicing the 802.11 or the H.264 standards will not necessarily result in the infringement of the asserted claims.”In fact, Funai argues that “the evidence of record does not support the ‘standard essential nature’ of the ‘663, the ‘958, and the ‘867 patents.”“If, however, these patents are found to be essential to the standards, LSI has failed to satisfy its obligations to license those patents on fair, reasonable and nondiscriminatory (FRAND) terms.”

The Domestic Industry Requirement

Funai argues that there is no evidence that “any licensee actually practices any of the asserted patents.” LSI’s “only attempt to satisfy this requirement was based on the wholly unsupported assertion that [a] licensee’s . . . 802.11 compliant products are ‘more likely than not’ and ‘highly likely’ to practice the ‘958 and ‘867” patents, which the ALJ properly rejected.Thus, LSI “failed to establish that their licensing investments are related to any articles protected by the asserted patents, which is a critical statutory requirement for any domestic industry finding.”

Funai Comments on Public Interest and Remedy

Funai argues that LSI’s RAND commitments judicially estopps LSI from walking away from such commitments and prevents entry of an exclusion order. Specifically, LSI has “signed FRAND commitments with the ITU (for the ‘663 patent) and with the IEEE (for the ‘867 and ‘958 patents) and have used the alleged standard essential characterization of these three patents to its benefit.”Further, the public interest is not served by an exclusion order because “LSI never made an offer that complied with its RAND obligations, and Funai is prepared to accept a FRAND offer.”

RAND-Encumbrances on the Asserted Patents

Funai argues that LSI has “concede[d] that it has RAND obligations in connection with the ‘958 and ‘867 patents.” The appendix to LSI’s letters of assurances to the IEEE includes both the ‘958 patent and the patent application that would issue as the ‘867 patent.With respect to the ‘663 patent, LSI’s predecessor-in-interest “made a licensing declaration to the ITU” that “obligated it to ‘grant a license to an unrestricted number of applicants on a worldwide, nondiscriminatory basis and on reasonable terms and conditions to use the patented material necessary in order to manufacturer, use, and/or sell implementations” of H.264-compliant products.

History of Negotiations

Funai asserts that it “negotiated in good faith with LSI . . . before LSI filed this investigation in March 2012, and has continued to negotiate even during the pendency of this investigation.” “Yet after [redacted] of zigging and zagging positions by [LSI], Funai is still awaiting an offer that could be considered ‘fair and reasonable’ under any standard.”The parties could not reach a license agreement after having met at least thirteen (13) different times and exchanging several pieces of correspondence and presentations.

Licenses to LSI’s Alleged SEPs

Funai asserts that “[t]he licenses identified by LSI are of minimal value in determining a RAND rate for the ‘663, ‘867 and ‘958 patents” because many, if not all, of those licenses included patents other than the three (3) at issue in this Investigation. LSI’s expert apparently attempted to “disaggregate the value of the ‘663, ‘867 and ‘958 patents from LSI’s” other licenses but this analysis, according to Funai, “is replete with problems.”

Industry Practice for Licensing Similar Technologies

Funai asserts that two patent pools are relevant here: MPEG LA and the Via Licensing Pool. MPEG LA manages a pool of H.264 patents submitted by many companies, and “licenses approximately 275 U.S. patents and over 2400 total patents to almost 1300 companies, including Funai.”Funai argues that the royalty rate from the patent pool (which is redacted) is comparable to the rate for LSI’s alleged SEPs.Unlike Realtek, Funai argues that the Via Licensing Pool – which “contains over 250 patents. . . licensed at rates between $0.05-$0.55 cents per unit for the entire pool” – provides evidence of a RAND rate for patents essential to the H.264 and 802.11 standards.

Forums in Which a RAND rate has been Established

Funai asserts that it “has not at this time sought affirmative determination of a RAND rate.” But Funai asserts that any RAND rate determined for the ‘867 and ‘958 patents in Realtek’s breach of contract action against LSI in the N.D. Cal. “would apply to any Funai products that practice the 802.11 standard using non-Realtek integrated circuits as well.”

Funai cites to the decisions in Microsoft and Innovatio to support its asserted RAND royalty rate (which rate is redacted).Funai relies on Microsoft’s holdings that, “for a portfolio of H.264 patents, a RAND rate was between 0.555-16.389 cents” and, for patents essential to the 802.11 standard, a RAND rate was between “0.8-19.5 cents.”Funai also cites to Innovatio’s holding setting a RAND of approximately “0.5 cents per patent average rate” as support for its proffered RAND rate.

Alleged Abuse by LSI of Their RAND-Encumbered Patents

Funai argues that LSI has “in several ways attempted to gain undue leverage over or constructively refuse[d] to negotiate a license with Funai” with respect to LSI’s alleged SEPs.

Holdup.First, LSI filed the ITC investigation prior to negotiating a license setting a RAND royalty rate.LSI waived its right to seek an exclusion order from the Commission “[w]hen LSI declared its patents essential to a standard.”“Because money [through a RAND license] can compensate LSI fully for any purported infringement, injunctive relief should be unavailable to LSI.”But “by coming to the Commission, LSI is trying ‘to extract holdup value by exercising market power that it would not have had absent the inclusion of its technology into the standards.’”

Royalty Stacking.Second, LSI “does not account for the scores of patent holders that also are entitled to RAND rates for their intellectual property.”According to Funai, “[t]his results in royalty stacking, which effectively overvalues the standard-essential patents, a phenomenon that RAND policies are designed to avoid.”For the 802.11 standard alone, “[n]inety-two companies have submitted letters of assurance for patents covering [that] standard.”Forty-eight companies have declared patents essential to the H.264 standard.“If every holder of a RAND-encumbered patent for these standards was entitled to the royalty rate demanded by LSI, the total licensing fees for a client would be cost-prohibitively high.”

An Exclusion Order Should Not Issue

Funai argues that the ALJ was wrong in concluding that an exclusion order should issue if the Commission finds infringement of LSI’s alleged SEPs. The exclusion order requested by LSI would apply to Funai’s downstream products that incorporate the allegedly infringing chips.However, “excluding downstream products potentially expands the scope of an exclusion order and increases the risk of interfering with legitimate commerce.”The ALJ and the Commission are required to consider the value of the infringing article compared to the value of the downstream products into which they are incorporated.The higher the value, the more likely an exclusion order including the downstream products will issue.Relying on its expert’s testimony, Funai contends that, contrary to the conclusion of the ALJ, “the value of the allegedly infringing integrated circuits remains miniscule compared to the value of the Funai Downstream Products.”This weighs against the issuance of an exclusion order.

Funai Comments on Bond

Funai argues that the ALJ properly rejected LSI’s contention that it is entitled to a 100% bond. According to Funai, LSI “offered no evidence in their post-hearing brief concerning the proper bond (likely because such evidence would have undermined its argument that its offer to Funai complied with RAND).”“Because [LSI] is required to affirmatively prove bond, in the absence of evidence from [LSI], the proper bond value is zero.”

Should the Commission determine that an exclusion order should issue and a bond is required during the Presidential review period, Funai contends that “the bond should be no more than 0.555-16.389 cents for the ‘867 and ‘958 patents, and no more than 0.8-9.5 cents for the ‘663 patent, as found in the Microsoft” case.Funai contends that these ranges are also consistent with the RAND rate set by Judge Holdermann in the Innovatio case.

What’s Next?On November 14, 2013, the parties filed reply comments with the ITC, but those comments were filed under seal.The public versions of the reply comments were recently made available and will be the subject of a separate post.

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David W. Long founded Essential Patent LLC (http://essentialpatent.net) to focus on patent law and related hi-tech intellectual property issues, including standard essential patents, licensing negotiations, mediation and other legal services. David has over twenty-five years of telecommunications experience, including over twenty years litigating complex patent cases in federal district and appellate courts. Read More

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The Essential Patent LLC intellectual property law firm welcomes you to the Essential Patent Blog! This blog was started in response to increased interest and litigation surrounding standard-essential patents (SEPs). Historically, most SEP issues were relegated to theoretical discussions in academic literature or conference presentations. But that’s changing.